The Business Cycle
The Boom and the Bust
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- The Boom and the Bust
Business cycles are the short-run fluctuations in economic activity that can cause output to be above, or below, the long-run trend.
The peaks and troughs, or high and low watermarks, divide the business cycle into two distinct phases, expansions and contractions.
Real World Examples
The Great Recession of 2007-2009
Like extreme weather, economic crises are a regular part of life. Households, firms, and the government must keep rainy day funds for when the economy falters just like homeowners insure their properties against extreme weather. Unfortunately, many participants in the economy were not prepared in 2007 when the Great Recession hit. The perfect storm of deregulation in the banking industry, poor incentives created by misguided policy, easy money, meaningless credit ratings, and predatory lending led to an unsustainable run up in home prices. The exuberance of this bubble led to unsustainable overconsumption, instead of more saving. As a result, it will take considerably longer to repair the damage done in order to return to full employment and achieve sustained economic growth.